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Predicting rating changes for banks: how accurate are accounting and stock market indicators?

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Abstract

We aim to assess how accurately accounting and stock market indicators predict rating changes for Asian banks. We conduct a stepwise process to determine the optimal set of early indicators by tracing upgrades and downgrades from rating agencies, as well as other relevant factors. Our results indicate that both accounting and market indicators are useful leading indicators but are more effective in predicting upgrades than downgrades, especially for large banks. Moreover, early indicators are only significant in predicting rating changes for banks that are more focused on traditional banking activities such as deposit and loan activities. Finally, a higher reliance of banks on subordinated debt is associated with better accuracy of early indicators.

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Authors and Affiliations

  1. Université de Limoges, LAPE, 5, rue Félix Eboué, 87031, Limoges, France

    Isabelle Distinguin & Amine Tarazi

  2. Fordham University, 1790 Broadway, 11th Floor, New York, NY, 10019, USA

    Iftekhar Hasan

  3. Bank of Finland, Helsinki, Finland

    Iftekhar Hasan

Authors
  1. Isabelle Distinguin
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  2. Iftekhar Hasan
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  3. Amine Tarazi
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Correspondence to Iftekhar Hasan.

Additional information

This paper was prepared for the European Commission ASIA-LINK project B7-3010/2005/105-139: Safety and Soundness of the Financial System. The contents of this paper are the sole responsibility of the authors and can under no circumstances be regarded as reflecting the position of the European Commission or the Bank of Finland.

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Distinguin, I., Hasan, I. & Tarazi, A. Predicting rating changes for banks: how accurate are accounting and stock market indicators?. Ann Finance 9, 471–500 (2013). https://doi.org/10.1007/s10436-012-0195-0

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  • DOI: https://doi.org/10.1007/s10436-012-0195-0

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